Ep. 69: PEEC's 1Q 2024 meeting: AI, private equity, and more

[ Music ] >> Welcome to Ethically Speaking. I'm Tony Lee Andrews, Director of the AICPA Professional Ethics Division. And I'm back today with Division Staff to give you an overview of what happened this week at the Professional Ethics Executive Committee Quarterly Meeting. The open meetings span two days and covered hot topics like artificial intelligence and private equity, and also harmonization with international ethics standards. We were happy to welcome more than 120 observers who, by the way, will be getting CPE certificates. If you're interested in earning free CPE for observing future meetings, go to www.aicpa.org/peakmeeting and register. Let's start with the private equity investment infirm's update that the committee received. And this is not an easy topic, but it certainly is a hot topic today in the profession. The private equity task force developed key assumptions for two investment scenarios, one in which the private equity firm has an investment that allows for control over the nonattest entity, and one in which the private equity firm has an investment that allows it to exercise significant influence over the nonattest entity, but not control. The task force has performed an exercise based on these key assumptions for scenarios to compare the results of applying the current alternative practice structures interpretation with applying a covered member approach followed by the application of the conceptual framework for independence interpretation. So based on the results of this exercise, the task force is recommending a conceptual framework approach for individuals and entities that are outside the scope of covered members, but who still may create threats to independence. The task force has also made several preliminary conclusions regarding the various entities and relationships in the private equity structure. Specifically related to portfolio companies. And those are outlined in the agenda materials, along with other preliminary conclusions that have been made related to portfolio companies, registered investment advisors, general partners, independent investors, investees of an independent investors, and others at the direction of the PE firm. So as you can see, lots of legs with this one. So now I'm going to hand it over to Summer Young to talk about section 529 plans. Thanks, Tony. The task force asked for peaks input as to whether the underlying investments in a 529 savings plan are a direct or indirect financial interest of the covered member. As at our task force meetings, we identified characteristics of both the direct and indirect, and the task force thought the criteria for control and direct financial interest was subject to interpretation. Pete gave us the direction that the underlying investments are an indirect financial interest as just being able to select from available portfolio investment options and the plan does not constitute control. So with that direction, the task force will drive changes to the interpretation and bring that to Pete for exposure in May. And now Jennifer Kapler is going to discuss simultaneous employment. Thanks, Summer. So I want to bring you some highlights today of the revisions that we brought to Pete regarding the definition of simultaneous employment or association and also some proposals to the changes to the interpretation. So my big two big takeaways would be that we expanded the scope of the definition to include all of those serving in governance as opposed to identifying specific roles like a director or an officer. And then the other significant change that I wanted to highlight was a change to the scope on the exception for those that might be serving in the military or potentially like the Coast Guard, auxiliary services like that. And that exception is now going to cover not just that specific situation, but any situation with an employment law that might be federal, state, or local when that's in conflict with the interpretation. So that was an expansion in the scope. So those are the two big takeaways I've got for simultaneous employment and I'm going to turn it over to Melissa. Thanks Jennifer. For the engagement subject to the statements, all standards for attestation engagements or the SSAE's task force, the committee received an update on task force activity since the last meeting. So within that subtopic that addresses SSA engagements within the code, there is a non attest services provision that indicates that otherwise prohibited not to services can be performed when the service doesn't relate to the subject matter of the engagement and when the general requirements are met. The task force has reviewed most of the non attest services subtopic at this point and has carefully considered how those requirements would apply in an SSAE engagement. And whether that is clear by using the provision within the SSAE subtopic, overall they've been pretty surprised to realize how financial statement focused most of these non attest services interpretations are and agree that clarifications would be helpful. And that's especially important with the growing number of SSAE engagements and the growing variety of subject matter when you consider ESG reporting. The chair also stressed that through this review there hasn't been any instances where the task force believes that underlying requirements should be changed. So this is strictly considering what clarifying revisions could be helpful. The task force has not yet determined how clarification could be achieved, but it could include enhancements to the interpretations that address SSAE's or it could be that revisions to each non attest services interpretation would be most helpful. Or as always developing non atta-tative guidance could be an option as well. For the May committee meeting, the chair hopes to be able to share how the task force believes these clarifications should be made so more to come on this. Now I'll turn it over to Arina for an update on our technology related projects. In the last few weeks, Melissa, the artificial intelligence or AI task force had a kickoff meeting in December 2023 and then another meeting in January 2024. And during those discussions, the meeting, the task force noted that some concerns identified by the AI task force. I addressed in ISP's technology related revisions issued in April 2023. And so at the February peak meeting, the AI task force recommended expanding the scope of the AI project to consider ISP's guidance on using the output of technology and peak agreed with the recommendation. And before we move on to projects on international front, I wanted to mention that the digital assets and the engagement team group audit task forces will be meeting in spring and will present an update of those meetings at the May peak meeting. And with that, I'll pass it on to Ellen. Thank you, Arina. So we have a number of projects that we are monitoring or undertaking that stem from international standards setting. And so the next part of the podcast really is going to focus on that. We'll begin by discussing the strategy and work plan that was approved by ISP. And then we'll go into ongoing projects that we are monitoring. And then finally, we'll wrap up with projects that we are undertaking that are related to our international harmonization efforts. So Arina, why don't I kick it back to you to start off with the strategy and work plan? Sure. So as Ellen mentioned, ISP approved a revised ASWU/PEOS strategy and work plan for 2024, 2027 in December. And the major revisions to the ASWU/PEO include addition of the three new work streams. First, exploring, extending the impact of the code to all preparers of sustainability information. Second, development of profession, agnostic, independent standards for sustainability, assurance, engagements not within the scope of Part 5. And the third project is firm coalition governance subject to the public interest oversight boards approval. The SWP is expected to be issued by mid April 2024. And now I'm turning it over to Sarah to begin our discussion on ongoing ISP project that we are monitoring. Thanks, Arina. So ACPA staff provided an update to peak on our monitoring of an ISBA staff led project that will develop a report and recommendations to ISBA with respect to collective investment vehicles, pension fund arrangements, and investment company complexes. ISBA staff will research these entities structures and their relationships with trustees, managers and advisors to ensure that the independence provisions and the application of their related entity definition in the international independent standards in part 4A of ISBA's code remain fit for purpose and report their conclusions to ISBA at the end of this year. This project is intended to address the public interest associated with these entities as they were considered but not ultimately included as mandatory public interest entities or pies. AICPA staff assembled experts in these topics and has met with ISBA project staff twice to provide education on these structures and relevant independent guidance on affiliates in the US environment. John will now provide an update on another project from honorary. Okay. Thank you, Sarah. I will give a quick update on the ISBA's tax planning services initiative or work. The ISBA board approved the new tax planning services section of its code at the board's meeting in December. The new section and guidance will be effective June 30th, 2025 and the final approval is expected in April by the PIOB. We are awaiting the issuance of the final pronouncement as well as the basis for conclusions document so that we can begin our work towards harmonization. The ISBA still has a number of areas of concern based on the final language approved so stay tuned as we hurry up and wait for the final documents. Now over to Melissa for ISBA's monitoring regarding sustainability. Thanks, John. The committee received an update on ISBA's sustainability project. ISBA actually approved the exposure draft for this project at its December meeting and it was released at the end of January. The committee also provided feedback on several points that are planned to be included in its comment letter. One of those points is related to the fact that ISBA seems to be ahead of IWA SB and the scope of its respective proposal. So for example, group assurance requirements are included in ISBA's proposal while those are not yet developed in the assurance standard. So ISBA has requirements related to another practitioner and value chain entities when it's not clear how those assurance standards will require. The assurance work to be performed over specific components or value chain entities. So the concern here is that this will cause some confusion and practice and challenges for practitioners to apply the requirements appropriately and consistently. ISBA moving ahead of IWA SB has also seemed to result in ISBA including performance requirements in its proposal that may be best developed for another standard setter like IWA SB. Another point that was discussed was ISBA's approach to apply part for a requirements which are specific to financial statement audits to the sustainability assurance engagements without sufficient consideration of whether those threats are the same. The concern here is that sufficient consideration hasn't been given to one. The PAC considerations which are more focused on financial condition rather than sustainability impact and to the requirements to apply independence to related entities regardless of whether those entities report or able to influence information that is subject to the assurance engagement. Under ASCPA requirements independence is only required with respect to the responsible party and then the conceptual framework would be used for other circumstances that create threats. These are just a few of the points that were discussed during the meeting but you can find a more complete list in the agenda materials. Ethics staff plans to continue to work with peak monitoring group, our ANA team, PEAKS General Counsel in order to build out our points for the letter and with a goal to submit the comment letter ahead of the next committee meeting in May. If you already perform assurance work in this area or you plan to, we'd strongly encourage you to read through ASCPA's exposure draft and consider submitting a comment letter. Now I think I'll turn it over to Ellen for an update on another ASCPA project which relates to the use of experts. Thank you Melissa. Yes, so we reported that ASCPA issued their exposure draft related to using the work of an external expert and that comments were due on April 30th of this year. We are in fact working on a comment letter and a link to the exposure draft will be in the show notes for you. This proposal really does have a wide implication so it applies not only to members in public practice but it also applies to members in business. We encourage you to review the proposal and share it with your external experts that your firm or your employee organization uses to get their input on the new requirements. Yes, but is in fact looking for input from external experts on requirements so I would go so far as to encourage you to have them to respond as well. At a very high level the requirements call for services that do involve a test work that you evaluate the external experts' competence, capabilities and objectivity and only use those external experts when you have concluded that they are competent, capable and objective. Now if you are also providing a test work, there are additional requirements. The main additional requirements is that external experts will need to report to you relationships and circumstances like those that you see in the independence rules so things dealing with financial interests and loans and other services that external experts might be providing to the client. For you to evaluate those relationships and circumstances to ensure that the external expert is objective, if you conclude that they aren't then determining whether or not safeguards could be put in place so that you could use that expert. So again, really high level, very important and it expands, you know, if you're just doing tax or financial planning work and you're going to need to use an expert, this exposure draft is applicable to you and I would encourage you to take a look at it. I'm going to go ahead and turn it over to Sarah now to talk about our international harmonization projects. Thanks, Ellen. So it's just a quick update on the fees project that's been ongoing for a few years now. So the fees task force requested the committee's input on proposed updates to the plain English guide to independence related to the new fees interpretations that were adopted at the August 2023 meeting and are which are effective January 1st, 2025. The updates to the guide are expected to be published next month. Jennifer Clayton's up next to provide an update on our PI project. Thanks, Sarah. Just a recap for public interest entities in our PI project. Back in November, the peak approved a new definition for publicly traded entity, which is effective December 15th, 2023. And then also every bias definition of public interest entity or PI, which is effective December 15th, 2024 with one caveat. If a PI would no longer be a PI under the new definition, the effective date was December 15th, 2023. Because of the nature of this project, the peak approved the division to prepare a basis for conclusions document to provide the background on how the peak arrived at these definitions. The basis for conclusions document was presented at this peak meeting and feedback was obtained. Additional feedback is expected from other stakeholders. So once that is obtained and the peak performs a fatal flaw review that that document will be made available in the online ethics library. I'll turn it over now John to talk about tax services. Okay, thank you, Jennifer. In reviewing the updated IASB non audit services guidance regarding tax services for audit clients, the peak agreed with the task force back in November that further authoritative guidance would be helpful regarding the areas of tax planning and tax advisory services. And more specifically when a firm is advising an audit client on certain matters of tax avoidance or minimization. I as the introduce a general prohibition for providing these types of services to audit clients on list of firm is confident that the proposed treatment has a basis in applicable tax law or regulation that is likely to prevail. For independence purposes, the self review and advocacy threat is generally based on the probability of success if the tax treatment were to be challenged by a taxing authority. The task force considered that be more likely than not threshold of success that has a common standing in the United States regarding PCOB independence rules, fast be guidance for uncertain tax positions as well as IRS guidance for avoidance or prepare penalties. And the task force meant and brought to peak its evaluation of both. I.S. Vs. Confident that the position is likely to prevail threshold as well as comparison to more likely than not threshold. There was a healthy discussion and while some members supported the using the likely to prevail threshold many of the peak members expressed that the more likely than not threshold for independence was already a none term to U.S. practitioners and that he believed that it was substantially equivalent to I.S. Vs likely to prevail threshold. The task force also proposed and P. could agree that additional guidance for tax planning and tax advisory services would be best added to the existing tax services interpretation in the non attest services subtopic of the code. The task force will take all of these comments into consideration at its next meetings and hope to prevent present a draft of the updated tax services interpretation to peak for its consideration at its main meeting. Now over to Lisa and I.S. Vs. N. As general. Thanks John. So the non assurance services I.S. Vs. Harmonization task force focusing on the general area of non assurance services presented to peak updates to the employee and executive recruiting interpretation and these updates focused on searching for seeking out candidates. Whether you could identify one candidate or needed to be multiple candidates to the client advising on terms of employment and reference checks peak provided lots of suggestions to the task force and to the task force is going to take those suggestions and bring back more revisions to the May meeting. And I'll turn it over to Tony to bring us home. Thanks to all of the team for their work on these projects as well as to our volunteers and thanks to our audience for joining us today. Peaks next meeting is May 9th and 10th. As you've heard today we've covered a lot of ground so be sure to check the show notes for any links to any resources that were mentioned today. And don't forget to go to www.aicpa.org/peakmeeting to register to observe future meetings. 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